The Reserve Bank of Bank (RBI) on Tuesday issued notification to all banks for not charging any foreclosure/prepayment penalties on floating rate home loans. The move brings cheers among home loan borrowers, who can now take advantage of better credit pricing in a perfectly competitive banking industry.
"Though many banks have in the recent
past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need to ensure uniformity across the banking system. It has, therefore, been decided that banks will not be permitted to charge foreclosure charges/pre-payment penalties on home loans on floating interest rate basis, with immediate effect," the banking regulator said in a release.
Earlier in its annual monetary policy dated on April 17, 2012; RBI had mentioned the need to remove the foreclosure/prepayment penalty following the Damodaran Committee's observation on the same topic. Foreclosure levy apply when a borrower wants to switch his loan from the exiting bank to another bank offering lower floating rate of interest or s/he wishes to shift from the existing rate to a new rate (relative lower) within the same bank. It attracts prepayment penalties when you repay your home loan well before the stipulated tenure of repayment.
As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source. Removal of such charges will lead to a reduction in the discrimination between existing and new borrowers and the competition among banks will result in finer pricing of home loans with the floating rate, RBI said.
"Most of the lenders have already waived such charges. After this move, bank will try to bring down old rates. However, new rates may go up. Our bank has already waived our all prepayment/foreclosure chares in last January. The objective is to retain a customer," R K Bansal, Executive Director, IDBI Bank told Moneycontrol.com.
Banks broadly charge 1-2% (on the balance amount) in case of any foreclosure or prepayment of loans. After the proposal on removal of charges figured, banks were trying to convince RBI about its implication on asset liability management and thereby to drop the idea. However, the argument did not stand.
Banks mostly fund home loans on floating rates through short-term deposits (1-3 years), according to bankers. This should not lead to any long term mismatch when some loan accounts leave your bank due to higher interest cost, the regulator was of opinion.
"This move will give transparent services to home loan borrowers," said Ram Sangapure, General Manager (retail), Central Bank of India .
"Customers will now move out from banks that are charging higher rate of interest. However, banks will incur little bit revenue losses due to this. We have to fine tune our ALM structure a bit to sort out this problem."
Central Bank too has removed all such charges. Big private sector lenders including ICICI Bank and HDFC Bank apparently did the same. Meanwhile, some smaller lenders are allegedly continuing with such charges. With RBI's latest directive, the practice will cease to exist. (curtsey : money control)
Rupesh Yatesh Dalal
Head Research Department
Head Research Department
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